Larry Kudlow Says Business Investment Is Booming. Is It?

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In his interview with Fox Business Friday, Larry Kudlow also said that the new tax law has sparked a capex spending boom as businesses turn their tax cut windfalls into productive investments.

“The economy is responding. This is now, the USA, according to the OECD, the hottest economy in the world. Money, capital, investment for new jobs and better careers flowing in from all corners of the world,” Kudlow said, adding that the new rules for writing off investments in plant and equipment, combined with the drop in the corporate tax rate from 35 percent to 21 percent, are “stimulating capital goods and investment spending,” citing $25 billion in new investments by Chevron as an example.

But that capex boom is less certain than Kudlow makes it seem. While Credit Suisse estimates that capital expenditures jumped 20 percent in the first quarter on a year-over-year basis, business investment remains well below historical norms. (Since the end of the last recession, capex has grown by about 15 percent, according to Blackstone Private Wealth Solutions, compared to the historical average of 59 percent.)

Throwing some cold water on Kudlow’s claim, The Wall Street Journal’s Nick Timiraos cited the president of the Federal Reserve Bank of Atlanta, Raphael Bostic, who said last week that the recent bump in business investment has likely been driven by the rebound in the energy sector. “Excluding energy and oil investment, investment growth is still below 5 percent on a year-over-year basis—a bit lower than the typical expansion average,” Bostic told the Rotary Club of Savannah.

James Pethokoukis of the American Enterprise Institute added that while he certainly hopes the GOP’s supply side tax cuts produce increased business investment and higher productivity, it’s too early for Republicans to declare victory given the years required for capital investments to play out — a point that former Trump economic adviser Gary Cohn recently made as well. And even if we do see positive economic results over the next few years, Pethokoukis said, it will be hard to separate the effects of the tax cuts from the effects of other factors, ranging from mundane cyclical effects to more exotic shifts in technology use such as artificial intelligence.

Other skeptics about the capex boom include investors on Wall Street. According to Goldman Sachs data cited by MarketWatch, a basket of stocks with high levels of exposure to capital investments has underperformed the market this year.